The Finance Minister did not oblige the gem and jewellery sector in the Budget. Neither was the duty on gold imports moderated from 10 per cent nor was there a repeal of the 80:20 rule, which requires gold importers to export at least 20 per cent of the metal they import. Jewellery stocks reacted badly, with market leader Titan Company losing 6 per cent on Budget day. While the lack of relief in the Budget is a disappointment, Titan can take it in its stride, thanks to a few factors.

In May this year, the RBI made two concessions to jewellers. In addition to nominated agencies and banks, it allowed star trading and premier trading houses to import gold under the 80:20 rule — this widens the sourcing options for domestic jewellers. The central bank also reinstated the gold-on-lease scheme.

This allows jewellers to settle payments for gold purchased from nominated banks within an agreed credit period based on the price at which it is sold to end-users — thus helping jewellers hold low inventory and save on interest cost.

The prohibition of the gold-on-lease scheme last year had resulted in jewellers resorting to more borrowings for working capital and bearing inventory risks/hedging costs. This dented their margins.

With credit purchases now allowed, margins of many jewellers, including Titan, should revive. The jewellery segment contributes nearly 80 per cent of the company’s sales and profit.

Consumption demand

Importantly, customer demand, squeezed for much of last year due to weak economic conditions, seems to be on the mend. This is reflected in Titan’s 12 per cent year-on-year profit growth in the March quarter as against the 19 per cent decline in the December 2013 quarter.

Excluding coins, jewellery sales volumes were up 7 per cent year-on-year in the March quarter; this suggests improving consumption demand even though investment demand remains weak. Also, the watches segment which contributes nearly a fifth of Titan’s profit saw healthy volume growth of 11 per cent in the March quarter.

Titan continued with its store additions even when the going was tough last year. This should pay off when the economic cycle turns for the better.

Growth prospects

The Budget has helped indirectly by putting more money in the pocket of the consumer, thanks to the hike in the income tax exemption limits and higher tax deduction on investments. Besides, gold prices in India, while higher than international prices due to the supply curbs, are still lower than levels last year. These factors should translate into higher demand.

Titan should also benefit from the increasing shift in the jewellery market towards organised players, and the company’s differentiated brand strategy in the watches market. In the near term, Titan’s performance may dip due to the voluntarily suspension of its ‘Golden Harvest’ scheme — a gold savings scheme for customers. The company, which has sought clarifications from the Government in the light of the new Companies Act, seems optimistic about the scheme’s resumption.

Since the last buy recommendation in February, the Titan stock is up 43 per cent — the good March quarter performance and the partial relaxation of the gold supply curbs in May helped. At ₹330, the stock now trades at about 40 times its trailing one-year earnings, compared with the 27-50 times it has traded at in the past.

Good scope for earnings expansion over the next two-to-three years provides room for upside in the stock, making it a good bet for investors with a long-term perspective. Relief on the gold import duty or on the 80:20 rule, when it happens, will provide a further boost.